Valmont Industries, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Valmont Industries, Inc. reported unaudited results for the thirteen and twenty-six weeks ended June 25, 2011, compared with the corresponding periods ended June 26, 2010. The company manufactures engineered infrastructure products, utility support structures, coatings, irrigation equipment and related products and services. Fiscal 2010 results were reclassified to conform to the 2011 segment structure following the Delta plc acquisition.
Financial Performance and Position
| Metric | Second quarter 2011 | Second quarter 2010 | Change |
|---|
| Net sales | $668.6 million | $481.6 million | +38.8% |
| Gross profit | $168.0 million | $128.6 million | +30.6% |
| Gross margin | 25.1% | 26.7% | Down 160 basis points |
| Operating income | $68.6 million | $37.3 million | +83.9% |
| Operating margin | 10.3% | 7.7% | Up 260 basis points |
| Net earnings attributable to Valmont | $45.8 million | $17.1 million | +167.8% |
| Diluted EPS | $1.72 | $0.65 | +164.6% |
| Metric | First half 2011 | First half 2010 | Change |
|---|
| Net sales | $1,236.6 million | $849.0 million | +45.7% |
| Gross profit | $304.5 million | $229.4 million | +32.7% |
| Gross margin | 24.6% | 27.0% | Down 240 basis points |
| Operating income | $113.9 million | $69.0 million | +65.1% |
| Operating margin | 9.2% | 8.1% | Up 110 basis points |
| Net earnings attributable to Valmont | $71.4 million | $33.6 million | +112.8% |
| Diluted EPS | $2.69 | $1.27 | +111.8% |
- Cash and cash equivalents were $326.8 million at June 25, 2011, compared with $346.9 million at December 25, 2010.
- First-half operating cash flow was $19.9 million, versus $54.0 million in the prior-year period. Capital expenditures were $27.9 million, versus $11.0 million.
- Net working capital increased to $816.4 million from $747.3 million, primarily because inventories increased to $366.2 million from $280.2 million and receivables increased to $453.1 million from $410.6 million.
- Total interest-bearing debt was approximately $500.8 million at June 25, 2011. Long-term debt totaled $489.4 million, including $450.0 million of 6.625% senior unsecured notes due in 2020 and $14.0 million drawn on the revolving credit facility.
- The company had $246.9 million of additional borrowing capacity under its revolving credit facility and reported compliance with all debt covenants. The last-twelve-month leverage ratio was 1.67 and the interest coverage ratio was 8.41.
- The diluted first-half effective tax rate was 27.0%, compared with 37.7% in the prior-year period. Cash dividends were $0.180 per share in the second quarter and $0.345 per share for the first half.
Material Changes Versus the Prior Comparable Period
- Sales increased across all reportable segments. First-half sales growth was strongest in Coatings, up 92.6%, Irrigation, up 51.6%, and Engineered Infrastructure Products, up 35.4%.
- Irrigation first-half operating income increased 77.8% to $56.9 million, and Coatings operating income increased 75.7% to $25.4 million. Utility operating income declined 2.6% to $26.5 million, while Engineered Infrastructure Products declined 6.8% to $13.7 million.
- The Delta acquisition contributed approximately $218.0 million of incremental first-half sales and $12.5 million of incremental operating income through the full-year comparison effect.
- Gross margins declined because of higher steel and other raw-material costs, increased LIFO expense, competitive pricing pressure and first-quarter Australian flooding that disrupted customers and suppliers.
- SG&A as a percentage of sales improved to 15.4% from 18.9% for the first half, partly because 2010 included higher Delta acquisition and integration costs. Absolute SG&A increased because of Delta expenses, higher incentive accruals and increased compensation.
- The company acquired the remaining 40% of Donhad Pty. Ltd. for $25.3 million and acquired a 60% interest in an irrigation monitoring services company for $1.5 million.
Guidance, Outlook, Risks and Unusual Items
- Management expected fiscal 2011 capital spending of approximately $60 million to $70 million.
- Management intended to keep long-term debt as a percentage of invested capital below 40%; the ratio was 26.6% at June 25, 2011.
- Management identified cyclical markets, raw-material availability and pricing, competitive pricing, product demand and acceptance, economic conditions, foreign exchange, international competition and governmental policies as factors that could materially affect results.
- Demand was supported by stronger agricultural conditions and favorable farm commodity prices, but North American transportation markets remained weak because of uncertain highway funding and state budget constraints. European demand and pricing were also described as weak.
- The company refinanced $150.0 million of senior subordinated notes due in 2014 with $150.0 million of 6.625% senior unsecured notes due in 2020. The redemption generated approximately $2.8 million of interest expense, including a redemption premium and unamortized issuance costs.
- The company recorded a $3.6 million loss on settlement of an interest-rate hedge related to the 2020 notes; the amount was recorded in accumulated other comprehensive income and will be amortized to interest expense.
- Lower tax rates benefited from nonrecurring items, including tax benefits associated with acquiring the remaining Donhad interest and the expiration of certain tax contingencies. Management stated that normalized year-to-date tax rates would have been approximately 32.0% to 32.5%.
- Contractual cash obligations totaled approximately $992.3 million, including $489.4 million of debt, $269.9 million of interest, $81.9 million of Delta pension contributions, $115.7 million of operating leases and $35.4 million of purchase commitments. Approximately $50.0 million of additional long-term liabilities related to tax, environmental and other matters had no reliably estimable payment timing.
- Management stated that liquidity was adequate based on cash, credit facilities, recent debt issuance and historical operating cash flows. Approximately $388 million of undistributed foreign earnings had not been provided for U.S. income taxes because management intended to reinvest them abroad.
- Disclosure controls and procedures were determined to be effective, and no material change in internal control over financial reporting was reported.
Important Facts for Investors to Verify
- Determine how much of reported growth reflects the Delta acquisition, versus organic volume, pricing and mix.
- Monitor whether steel and other raw-material inflation, LIFO expense and competitive pricing continue to pressure gross margins.
- Assess conversion of earnings into cash, particularly the effect of inventory growth, receivables and required pension contributions.
- Review debt maturities, refinancing terms, covenant headroom and the variable-rate exposure under the revolving credit facility.
- Evaluate the sustainability of the lower reported tax rate after the identified nonrecurring tax benefits expire.
- Review pension, environmental, tax and other contingencies, including the approximately $50.0 million of liabilities excluded from the contractual-obligations schedule.
